Thursday, December 02, 2010

Australia has lost its mantle as a world-beating economy after a sharp drop in economic growth returned us to the middle of the international pack, cast doubt on the Reserve Bank's decision to lift interest rates, and raised questions about our reluctance to spend.

The slide in economic growth from 1.1 per cent in the June quarter to a threadbare 0.2 per cent in the September quarter pushed the Australian dollar to a low of 95.4 US cents. Had it not been for an extraordinary 21 per cent jump in farm production in the quarter brought on by the breaking of the drought the economy would have shrunk. Even so Australia's growing population sent output per person backwards.

Market economists mostly dismissed the collapse as a "hiccup" or a "speed bump" brought on the closure of three Queensland coal ports in the quarter holding up 2 million tonnes of coal, but the Bureau of Statistics also revised away much of Australia's previous economic growth, pushing down the annual total from 3.3 per cent to 2.7 per cent.

The changes slash household spending and dramatically lift saving pushing the proportion of income saved to 10.2 per cent, the highest in two decades with the exception of the jump during the handout of emergency cheques during the economic crisis.

"Of course there’s a fair amount of consumer caution," said Treasurer Wayne Swan. "People are still consuming, but obviously many people are taking the opportunity to pay off the credit card, to pay off the mortgage a bit more quickly."

"The cautious consumer has appeared," said ANZ economist Katie Dean. "It's what the Reserve Bank was looking for."

"It tightened preemptively. If growth remains soft and consumers cautious, it may well stay on the sidelines until the second half of 2011."

Much of the relatively weak 0.6 per cent growth in household consumption was met by businesses running down stocks rather than lifting production. The behaviour suggests businesses as well as consumers are cautious, unwilling to plan on the basis of sustained economic growth.

With the exception of agriculture almost every industry either slowed or went backwards during the quarter including mining, construction, wholesale and retail trade and information technology.

Mr Swan said he expected things to improve and that it wasn't fair to make judgements based on one quarter.

"You don’t blow the final siren at quarter time in a footy game. The fact is that the outlook is really strong. I would caution against over-reading," he said.

Shadow Treasurer Joe Hockey called on the government to both "reign in its reckless spending” and to spend more on "essential infrastructure to improve productivity".

"Labor continues to shirk the hard decisions and refuses to do the heavy lifting," he said. "It is failing to capitalise on what is for Australia a very strong international environment."

Mr Swan pointed to a "huge pipeline of private investment," speaking as Rio Tinto approved a further $1.2 billion expansion of its Pilbara iron-ore operations.

Western Australia, Victoria and NSW have been responsible for the bulk of economic growth over the past year with spending in Queensland and Tasmania scarcely climbing.

If yesterday’s GDP figures are right, then the Reserve Bank has misread the economy, and given us interest rate rises we don’t read.

If the figures are wrong — and their startling revisions to 2009-10 data don’t inspire confidence — then they are just a bit of static we can disregard. But don’t assume it.

For once, Wayne Swan did not come out yesterday with graphs showing how Australia is leaving the ‘‘major advanced economies’’ for dead. And no wonder. All except France and Italy are now growing faster than we are.

With growth of 2.7 per cent, we are now being left for dead by Germany (3.9 per cent), Japan (4.1) and Korea (4.5).

But The real bottom line is growth in GDP per head. The Bureau of Statistics estimates it rose just 0.8 per cent in the year to September. It is still below 2008 levels.

How can that be when we’ve seen so much growth in jobs, our mineral exports are booming, and even after yesterday’s revisions, the Bureau of Statistics estimates that real national income grew 7.2 per cent in the past year?

Surely that makes us richer? Which means we spend more?

Well, some of us. The key to the puzzle lies near the back of the book, where the Bureau examines the sources of household income.

Over the past two years of crisis and rebound, it estimates, total wage income grew by just 7 per cent - including inflation, including all those 400,000 extra jobs.

Average income per employee grew just 3.6 per cent. Inflation grew 4.1 per cent. That means that on average, households depending on wage income are now marginally worse off.

Household income is growing: but the part of it that is really growing is the income of households who invest. Our income from profits, dividends, rent and interest shot up 16 per cent in the same two years. So households with significant investment income are much better off.

But investor households are more likely to reinvest their windfalls than spend them. That’s reflected in the Bureau’s stunning revision of its story on what happened in the last year. It has cut its estimate of household spending in 2009-10 by a cool $27 billion, and trebled its estimate of household saving from $23 billion to $68 billion.

Its picture of Australia’s growth now is extremely patchy. In the past year, almost half of all non-farm growth was in mining, mineral processing and construction. Most of the rest was in the finance sector and professional services (lawyers, accountants etc). The other two-thirds of the economy is growing little, if at all.

Many economists, inside government and outside, don’t believe this. They point to the stunning jobs growth of the past year, to the Bureau’s record of revising up past data, and dismiss yesterday’s figures as at most a ‘‘speed bump’’ on our road to the boom the Reserve predicts.

They may be right. But in my mind, these figures add to concerns that, as in early 2008, the Reserve may have misread the game. It has focussed on the needs of one industry in one state — mining in WA — when its job is to set interest rates for the entire economy. There is a risk that it has done too much, too soon.